Downing Street has moved to play down suggestions that the government might have to increase taxes to pay for improvements to schools and hospitals after a speech by Tony Blair.

The prime minister said the public could be persuaded they had to pay for good public services - which was widely taken to be a hint that taxes could go up.

It is these bread and butter issues
on which the government will rightly be judged

Tony Blair

Mr Blair's official spokesman later insisted that the prime minister believed in long-term investment in public services but that had to be allied to reform.

"In terms of the future, that will be a matter for the Comprehensive Spending Review, but what the prime minister was signalling was that continuing investment has to be allied hand in glove with reform - you can't
have one without the other," he said.

During his speech on Tuesday in central London Mr Blair acknowledged that reforming the public services was his "toughest challenge".

Although he said he was confident that schools, hospitals and the transport system could be reformed.

Terrorism fight

Mr Blair told an invited audience of public servants that efforts to improve these services were as important as the fight against terrorism, which he said had direct impact on life in the UK.

He insisted that despite the extra demand for government funds, ministers would stick to their spending plans for public services.

"The issue is how do they [the public] pay? Do they buy the services themselves or do they pay collectively through taxation?

"For reasons of equity and efficiency, I prefer the latter route."

Bread and butter

Since the 11 September attacks in the US, Mr Blair has been engaged in a ceaseless round of high-level diplomacy to help build a coalition for the war on terrorism.

"None of this should cause us to lose our focus on the more normal areas of public policy that will, in the end, determine our strengths and success as a nation as much as any international crisis," he said.

"The economy, living standards, crime, the welfare state and the public services - schools, the NHS and transport - it is these bread and butter issues on which the government will rightly be judged."

'Shrieking out for reform'

The prime minister praised public servants who often were working flat out in a system "shrieking out" for change.

Services must be "user-led" not "producer or bureaucracy-led", Mr Blair argued, espousing a "consumer first" message.

The best schools must be allowed to expand, says Blair

"The key to reform is to redesign the system around the user - the pupil, the patient, the passenger, the victim of crime."

And they would be judged against four core principles - national standards and accountability, devolution of responsibility to the front line, flexibility in staff working practices and greater choice.

In what will be seen as a move to head off the arguments of Conservative leader Iain Duncan Smith, the prime minister said there had to be a role for the private and voluntary sectors.

"It is not just investment that has held back reform, we have also been held back by ideological clashes, going back decades, which have distracted from the real challenge of improving our public services," he argued.

Little union reassurance

Trade unions are likely to find little reassurance in Mr Blair's speech, having already repeatedly voiced their concerns about plans for greater use of the private sector in health and education.

Keith Sonnet, deputy general secretary of Unison, said there was a role for private firms but he added: "What he seems to be talking about is replacing public service workers doing key public service jobs with the private sector where they have no track record of success."

For the Conservatives, shadow health secretary Liam Fox claimed Mr Blair was again offering the public only "empty words" after four years of promising better public services.